Foreign Exchange And Money Markets / Edition 2

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The authors provide an intimate knowledge of the fundamentals required to cope with the everchanging nature of the money and foreign exchange markets. Its emphasis is on the management of down to earth operations,covering how to read and take advantage of market quotations,the funds manager and the interaction between money and foreign exchange markets,funds management in a two-way market,problems and solutions in the trading room of a bank,problems and solutions of the multinational non-financial business,returns and risks,in foreign exchange operations,and control of foreign exchange and money market operations. This new edition is updated to account for recent changes and expanded to emphasize and broaden the treatment of money markets.
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Product Details

  • ISBN-13: 9780070526716
  • Publisher: McGraw-Hill Companies, The
  • Publication date: 10/19/1985
  • Edition description: REV
  • Edition number: 2
  • Pages: 476
  • Product dimensions: 1.19 (w) x 6.00 (h) x 9.00 (d)

Table of Contents

Preface xv
Part 1 Foreign Exchange and Money Markets 1
1 Who's Who in the Markets 3
Money market 4
What the money market is 4
Actors in the money market 4
Foreign money market 8
Why a Eurodollar market? 9
Actors in the foreign money market 11
Foreign exchange market 11
What the foreign exchange market is 11
Actors in the foreign exchange market 13
2 Interest Rates and Foreign Exchange Rates 19
Rates in the money market 19
Rates in the foreign money market 22
Spread between rates on domestic and Eurocurrency deposits 23
Revolving Euroterm loans 25
Rates in the foreign exchange market 30
Meaning of exchange quotations 30
Reciprocal rates 31
Cross rates 34
The chain 35
Price and volume quotations 36
Problems 38
3 Interactions between the Markets 51
The nature of cash flows 51
Value dates 54
Eligible value dates 55
Spot value dates 57
Forward value dates 57
Interactions between the money and foreign exchange markets 59
Operating in the money market 61
Operating in the foreign exchange market 61
Money market or foreign exchange market 66
Problems 73
4 Two-Way Markets: Bid and Offer Rates 82
Rates in the money market 83
Rates in the foreign exchange market 84
Meaning of exchange quotations 84
Reciprocal rates 86
Cross rates 87
Some comments on quotations 92
How can you evaluate the quality of a quotation? 92
Information content of quotations 93
Problems 95
5 Funds Management in a Two-Way Market 101
Swap rates 101
What are swap rates? 101
Bid and offer in the swap rate 103
Swap transactions 104
Swap transactions with matched cash flows: Covered interest arbitrage 107
Swap transactions with mismatched cash flows 109
Problems 119
6 Factors Affecting Spot Exchange Rates 122
The economics of international transactions 123
Trade in merchandise 123
Trade in services 126
Unilateral transfers 126
Capital account 126
Official reserves 128
Structure of the balance of payments 129
The determinants of exchange rates 131
The balance of payments approach 131
Purchasing power parity 132
Market expectations 133
International monetary system 136
7 Factors Affecting Interest Rates 140
The level of interest rates 140
Supply and demand for funds 141
Changes in the money supply 141
The shape of the yield curve 143
Market expectations 144
Other factors 146
Creditworthiness and market liquidity 148
Part 2 Problems and Opportunities in the Treasury Department 153
8 Operations in the Trading Room 155
Basic operations in the market 155
Taking advantage of disequilibrium situations: Covered interest arbitrage 155
Taking advantage of expected changes in interest rates 160
Rolling over a net exchange position 165
Catering to customers' needs in the forward market 169
Getting out of an exchange position 169
Creating a forward exchange market 174
Computing the effective yield or cost of funds 182
The value of float 182
All-in cost of exchange transactions 183
Cost of foreign currency deposits 184
Central banks' interventions in foreign exchange markets 186
How not to do it 187
Intervention to achieve domestic objectives 189
Intervention to support the spot rate 190
Problems 194
9 Funds Management in the Exchange Market 213
Borrowing and investing without an exchange position 214
Raising needed funds in a given currency 214
Investing available funds in a given currency 214
Another example 216
Borrowing and investing with an exchange position 219
Managing opposite cash flows in different currencies 229
Cash flows take place immediately 229
Cash flows will take place in the future 231
Funds management under exchange controls 236
Investing local funds under capital inflow controls 236
Borrowing foreign funds under capital outflow controls 238
Currency diversification and liquidity in a portfolio 244
Problems 246
10 Funds Management in the Money Market 259
Money market instruments in the United States 260
U.S. Treasury bills and other government securities 260
Federal funds 261
Certificates of deposit 264
Commercial paper 268
Repurchase agreements 268
Bankers' acceptances 270
Futures market for money market instruments 272
Money market funds 274
Comparing rates in the money market 275
Comparing market rates 275
Comparing lending rates 279
Typical money market operations 282
Liquidating an instrument before maturity 282
Tail-end gapping (riding the yield curve) 283
Spread trading (arbitrage) 285
Taking advantage of anticipated changes in interest rate levels 288
Hedging interest rate positions 290
Cash-flow management and the relationships among financial markets 292
Problems 294
11 Financing Commercial Transactions 297
Hedging the net exchange position created by trade 299
Financing trade after sale is realized 304
Finacing trade when order is received 308
Hedging alternatives in controlled exchange markets 313
Cross-currency hedging 314
A mutual indemnification agreement 315
Problems 320
12 Managing Exposure to Exchange Risk 327
Exposure: Cash flows versus accounting conventions 327
Hedging cash-flow exposures 332
Hedging in the forward market 334
Hedging in the money market 334
Hedging balance-sheet exposures 339
Hedging in the financial markets 339
Modifying the balance sheet 342
Problems 346
Part 3 Controlling Treasury Operations 351
13 Accounting for Treasury Operations 353
Accounting for money market operations 353
Recording money market transactions 353
Measuring profits in money market operations 356
Bookkeeping for money market operations 361
Accounting for foreign exchange operations 364
Recording foreign exchange transactions 364
Measuring profits in foreign exchange operations 366
Bookkeeping for foreign exchange operations 373
Accounting for joint exchange and money market transactions 374
Covered interest arbitrage 375
Creating a forward exchange market 378
Exchange transactions with all-in price quotes 379
Loan financing through swaps 381
14 Risks in Treasury Operations 386
Credit risk 386
Credit risk in the money market 387
Credit risk in the foreign exchange market 387
Sovereign risk 389
Rate risk 389
Rate risk in the money market 389
Rate risk in the foreign exchange market 390
Liquidity risk 391
Liquidity risk in the money market 391
Liquidity risk in the foreign exchange market 392
Evaluation of comparative risks 393
Comparative credit risks 396
Comparative rate risks 397
Comparative liquidity risks 397
Overall assessment 398
Problems 398
15 Control of Treasury Operations 401
Credit risk 401
Credit risk in the money market 401
Credit risk in the foreign exchange market 402
Sovereign risk or cross-border risk 404
Rate risk 405
Changes in interest rates 405
Changes in exchange rates 405
Liquidity risk 406
The cash-flow report 407
The liability-mix report 414
Miscellaneous controls 417
Aggregate limits 417
Confirmations 418
Protection against fraud 418
Appendix 420
Bibliography 421
Glossary 425
Index 447
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